Chapter 12 Flashcards
(20 cards)
What does the dollar return on a stock represent?
It is the sum of dividend income and capital gain or loss from holding a stock over a period.
How is the percentage return on a stock defined?
It reflects how much return is earned per dollar invested, expressed as a percentage.
What are the two components of a percentage return?
- Dividend yield
- Capital gains yield
What is an advantage of using percentage returns?
They allow easier comparison across different investments.
What is an advantage of using dollar returns?
They clearly show the actual profit or loss in monetary terms.
What is the arithmetic mean of historical returns?
The simple average of returns over a given number of periods.
What is the geometric mean of historical returns?
The average compounded return per year over multiple periods.
What is the difference between nominal and real return?
Nominal return is unadjusted for inflation, while real return accounts for inflation.
What is a risk premium?
The excess return required for investing in a risky asset over a risk-free asset.
How is the risk premium calculated?
Risk premium = Return on risky asset – Return on risk-free asset.
What does variance measure in finance?
The average squared deviation from the mean return, indicating volatility.
What does standard deviation measure?
The square root of variance, showing the average deviation from the mean return.
What is the normal distribution in finance?
A symmetric distribution of returns where mean and standard deviation define the curve.
What is Value at Risk (VAR)?
A measure of the maximum potential loss over a certain time period at a given confidence level.
What is the Efficient Market Hypothesis (EMH)?
The theory that security prices fully reflect all available information.
What does strong-form efficiency state?
All information, public and private, is reflected in stock prices—making insider trading ineffective.
What does semi-strong form efficiency state?
All public information is reflected in stock prices, making fundamental analysis ineffective.
What does weak-form efficiency state?
Current stock prices reflect all past trading information, making technical analysis ineffective.
What are the implications of an efficient market for NPV?
All investments in an efficient market are zero NPV investments.
What is the role of financial markets in the economy?
They allocate resources efficiently and provide information about returns for different risk levels.
